The game is afoot and accountancy circles have been buzzing with the recent suggestion of the Parliamentary Standing Committee (PSC) on Finance’s to the Finance Ministry to go slow on its path of widening the tax net and including presumptive taxation. While the lure of increased revenue receipts from presumptive tax is high indeed, the Finance Ministry has been beseeched by the PSC to change its currently vague stance on such taxes and publish a paper on the subject to clear the air.
Such a paper, when published, will have to include clearly identified areas where presumptive tax is applicable and how it should be rolled out in procedural terms. The immediate need of the hour, according to the PSC is to increase the ambit of presumptive tax vastly.
Presumptive taxation has been challenged by renowned economist Indira Rajaraman as, “Presumptive taxation, based on productive indicators, does not involve any departure from the principle of ability to pay. It is not caprice, and it is not a quick fix. Presumption based on consumption indicators, on the other hand, could be a quick fix, but will imply a capricious departure from the principle of ability to pay. The spadework required to establish legally robust presumptive norms based on production indicators is considerable. Once done, the incremental expenditure of time and effort on processing of returns will be greatly reduced.”
While it has the scope to become an instrument of fiscal reforms in the country, the Action Taken Report released by the PSC on the Department of Revenue’s (DoR’s) Demand for Grants for 2013-14, it says, “The Committee find the reply furnished by the Ministry to be rather general and non contextual. The Committee find that presumptive tax provisions were revised only once so far in 2009 and the Ministry have not elaborated on the tax yield arising from this review. Considering substantial growth in small businesses and the self-employed since the introduction of presumptive taxation scheme for certain businesses in 1994, the Committee would reiterate their recommendation that the present Presumptive tax regime be geared up with a view to generating substantial tax through this source and the net of Presumptive Tax should be widened. In the meantime, the Committee desire that the Income Tax Department should prepare a zone-wise list / data-base of all the categories of businessmen, traders, professionals, service providers etc. ,who can be brought under the Presumptive Tax net, depending upon their size / turnover etc.”
Not at all happy with the Finance Ministry’s reply to its recommendations made in April 2013, the PSC had stated, “In the context of tax base, the Committee found that presently there were provisions in the Income Tax Act for levying Presumptive Tax, wherein the concept of ‘Presumptive Tax’ has been introduced to bring a number of business and service providers, irrespective of their area of operations, earning substantial income. The Committee however, observed that the existing provisions have not been yielding the potential quantum of tax and would therefore recommend that the present presumptive tax regime be reviewed so that substantial tax is generated through this source, as there are evidently a large number of individuals in businesses, trades, services and professions which are still outside the tax net.”
Since the introduction of presumptive taxation by Dr. Manmohan Singh in the 1992-93 budget, the Ministry has lost no opportunity to emphasise how the provisions relating to the presumptive taxation scheme need to be continuously reviewed to widening the tax base and reduce the compliance burden on small assesses.” Along with the approaches to implementation in different business, a lot of research has discussed the applicability of such a tax in businesses that are “hard-to-tax” such as farmers, small enterprises, transporters, marriage hall operators and beauty parlors. Quite a few of these businesses have been known to under-report income or evade taxes under presumptive taxation.
Such a vague stance on such a potentially difficult tax will require careful analysis and while the advantages are tempting, the wrong implementation of presumptive tax can backfire on the Finance Ministries’ hands easily. We need to get clarity and get it soon.